One of the greatest challenges that many small business owners struggle with is pricing their products or services.
It’s a universal struggle, as there aren’t many resources on pricing strategies that are readily available, easy to find or easy to understand.
This leads to an unfortunate reality that many entrepreneurs encounter: the focus to become the low-cost provider. While yes, it is a strategy, you’d better have the processes in place that allow you to crush costs to maintain low price leadership.
It’s not a strategy that I recommend for most small businesses, as it often leads to a race to the bottom — especially with the downward pressures that e-commerce — and most don’t have the needed resources to battle the industry giants that often own this space.
The second pricing strategy that I often see is a focus on copying a competitor’s prices.
Again — this isn’t the best way to go, given that you have no idea what costs your competitor has OR what their profit margins might be (if any.) It may seem logical at first glance, but don’t do it.
A third common mistake I see small businesses make? >> Letting their relationship with money impact their pricing strategy.
We all have a relationship with money based on how we were raised, past financial successes and stresses we’ve experienced, etc. It’s crucial to not let our personal relationship with money impact our business pricing strategies.
For example – if you personally believe that no one is worth more than $50/hour for their services, you’ll struggle to charge $250/$300/hour for your own time. If you let yourself caught up in your own mental stories about money, you’ll never run a successful business.
So, how do you come up with a successful pricing strategy? There’s a lot to consider.
Here are some of the basics:
1. Understand what you’re selling: is it a commodity that everyone else is selling, OR do you have a unique product/service that’s difficult for people to compare to others? Knowing what you are selling will influence your pricing strategy.
2. Find your competitive differentiation: what sets you apart? Shout that from the rooftops! That’s what lets you justify your rate. If you struggle to find a differentiator, your only pricing strategy left will be to fight it out in the marketplace, and that’s not a sustainable strategy.
3. Know your true costs: understanding your direct and indirect costs and how they impact your profit margins is key.
4. Understand the competition: you need to do market research, not copy other’s price. Understand the market and where your offering fits in the mix. Is it high end? Middle of the road? You have to figure that out yourself.
5. Don’t let your personal beliefs dictate your price: don’t let your personal money story negatively impact your pricing. Don’t just assume that your price is too high. Consider the value that you provide; focus on value, not price. That’s what will help you maximize profits.
6. When you have the opportunity, sell value, not hours: price based on the value your customer receives vs. the hours you spend. I see a ton of service businesses focus on hours when they should be focused on value. Here’s the catch though…you can’t value price UNLESS you can truly provide the value.
There are so many other issues that go into pricing strategy – like elasticity, scarcity and what the market will accept, competition, etc. We will tackle that more in detail in the future.
The big takeaway? If you can build a business that has a unique value proposition, you can sell on value – NOT on price. That’s where the magic is.
Please, share your thoughts so we can learn together!
Soar, don’t settle!